Mergers and Acquisitions in India: A Tax Perspective for 2024

[Pallavi Prakash]

Mergers and Acquisitions in India: A Tax Perspective for 2024

Mergers and acquisitions (M&A) have long been essential for corporate growth in India, enabling companies to consolidate, diversify, or enter new markets. In 2024, India continues to see a high volume of M&A transactions across various sectors, driven by digital transformation, evolving regulatory frameworks, and heightened investor interest. However, the success of these deals hinges not just on financial and strategic considerations but also on the tax implications, which can significantly influence the overall value and structure of a transaction.

Understanding the tax landscape in India has never been more critical for businesses engaging in M&A activities. This article provides a detailed overview of the key tax aspects businesses must consider when planning mergers or acquisitions in India, as well as the latest trends and regulatory updates for 2024.

Key Drivers of Mergers and Acquisitions in India (2024)

In 2024, the business environment in India is increasingly shaped by rapid digitalization, sector-specific reforms, and global economic shifts. Key industries witnessing significant M&A activity include technology, pharmaceuticals, renewable energy, financial services, and e-commerce. With the government continuing to ease regulations and make business-friendly reforms, India remains an attractive destination for both domestic and cross-border M&A deals.

Despite these opportunities, tax considerations remain a critical part of M&A planning. A well-structured tax strategy can help companies minimize liabilities, optimize transaction costs, and ensure compliance with evolving tax regulations.

1. Capital Gains Tax

One of the most important tax considerations in M&A transactions in India is capital gains tax. When a company or its shareholders transfer ownership in the form of shares or other capital assets, the profits from such transactions are subject to capital gains tax under the Indian Income Tax Act.

• Short-Term Capital Gains (STCG): If shares are sold within 12 months of acquisition, they attract a short-term capital gains tax, which is levied at a rate of 15% for listed equity shares.
• Long-Term Capital Gains (LTCG): For shares held for more than 12 months, the transaction falls under long-term capital gains taxation, which is subject to a 10% tax rate if the gains exceed INR 1 lakh in a financial year.

Special provisions under Section 47 of the Income Tax Act provide for capital gains tax exemptions in the case of certain mergers, demergers, or amalgamations, provided specific conditions are met. For instance, in a case where shares are transferred as part of a merger, the transaction may not attract capital gains tax, provided the transfer is in exchange for shares of the resulting company.

2. Carry Forward of Losses and Unabsorbed Depreciation

In M&A transactions, the ability to carry forward and set off business losses and unabsorbed depreciation is another critical tax consideration. Under Section 72A of the Income Tax Act, an amalgamated company (the entity receiving the assets or shares) is allowed to carry forward and set off accumulated losses and unabsorbed depreciation of the amalgamating company (the transferor), provided certain conditions are satisfied.

Some of the key conditions for this benefit to apply include:

• The amalgamating company must have been engaged in industrial activity for at least three years before the amalgamation.
• The amalgamated company must retain at least 75% of the book value of the fixed assets for a minimum of five years post-merger.

By taking advantage of this provision, companies can significantly reduce their tax liabilities by offsetting future profits with prior losses.

3. Indirect Taxes and GST

Goods and Services Tax (GST) has revolutionized the indirect tax regime in India, impacting various business transactions, including mergers and acquisitions. Although GST does not typically apply to the transfer of shares, transactions involving assets, real estate, intellectual property, or services can attract GST, depending on the nature of the transaction.

One notable exemption in the GST regime is the "transfer of business as a going concern." When a business is sold or transferred as a going concern, the transaction may be exempt from GST. However, if the acquisition involves the purchase of individual assets or intellectual property, GST will apply to the sale, and businesses must carefully evaluate the implications of these taxes.

4. Stamp Duty

Stamp duty is another key tax consideration in M&A transactions in India. The transfer of immovable property or shares as part of a merger or acquisition typically attracts stamp duty, the rates for which vary by state. Stamp duty can significantly impact the cost of an M&A transaction, particularly in large deals involving substantial assets or real estate holdings.

In some cases, companies may explore restructuring options to reduce their stamp duty burden, such as structuring transactions in states with lower stamp duty rates or pursuing court-sanctioned schemes of amalgamation, which may offer stamp duty relief.

5. Cross-Border M&A and Double Taxation Treaties

With India's increasingly globalized economy, cross-border mergers and acquisitions are common, especially in sectors like technology, pharmaceuticals, and e-commerce. These transactions involve additional tax considerations, such as withholding taxes, transfer pricing regulations, and double taxation avoidance agreements (DTAAs).

India has entered into DTAAs with several countries to avoid double taxation on capital gains and other income. These treaties play a crucial role in cross-border M&A transactions, as they often provide relief from double taxation or reduced withholding tax rates. Additionally, transfer pricing regulations ensure that cross-border transactions are conducted at arm's length to prevent profit shifting and tax evasion.

Recent Tax Reforms Affecting M&A in 2024

Several recent reforms in India have impacted the M&A tax landscape in 2024:

• Reduction in Corporate Tax Rates: In an effort to boost investment and attract foreign capital, the Government of India has reduced the corporate tax rate to 22% for domestic companies and 15% for new manufacturing entities. This reduction has made India a more attractive destination for M&A activities.
• Clarifications on Indirect Transfers: The Indian tax authorities have issued further clarifications on the taxation of indirect transfers, which occur when foreign entities transfer ownership of Indian assets through offshore deals. These clarifications provide greater certainty for foreign investors planning M&A transactions involving Indian subsidiaries.
• Equalization Levy: In a bid to tax the digital economy, India has implemented the Equalization Levy, a tax on digital transactions. This tax affects cross-border M&A deals involving technology and digital businesses, making it a key consideration for companies in the tech sector.

Conclusion

Mergers and acquisitions are a vital growth strategy for businesses in India, offering opportunities to expand, diversify, and enhance market presence. However, the tax implications of M&A transactions cannot be overlooked, as they can significantly influence the structure and success of a deal. By carefully navigating capital gains tax, GST, stamp duty, and cross-border taxation issues, businesses can optimize the financial and strategic outcomes of their transactions.

In 2024, as the regulatory and tax landscape continues to evolve, staying informed of the latest reforms and leveraging tax-efficient structures will be crucial for businesses seeking to maximize the value of their M&A deals in India.